LESSON DESCRIPTION:
This lesson is designed to assist families/individuals in identifying financial needs and resources, calculate debt balances and debt/income ratios, and decide if credit usage has become a financial management problem.
OBJECTIVES:
Participants will identify financial needs and resources.
Participants will determine credit issues.
Participants will calculate total debt and debt/income ratios.
Participants will determine income; expenses, including reserve account needs, and total debt.
Participants will learn how to track expenses.
MATERIALS:
“Debt Worry Box.” Please refer to Activity 1 of lesson presentation.
Participant’s packet of handouts including fact sheet for budgeting.
LESSON INTRODUCTION:
Set up a “Debt Worry Box” that attendees can drop questions or concerns in before the program begins.
RESOURCES:
· The Jump$tart Coalition website has a clearinghouse of materials related to financial literacy. The database can be browsed or searched or a search can be conducted for free items. Go to the website at http://www.jumpstartcoalition.org/home.html click on the resources tab, then on clearinghouse.
· National Consumers League (NCL), 202-639-8140.
· American Association of Retired Persons, 1909 K Street NW, Washington DC 20049.
· 66 Ways to Save Money (brochure). To order contact: Save Money, Consumer Federation of America, 1424 16th Street, NW, Suite 604, Washington, DC 20036.
LESSON PRESENTATION
Title Page with presentation information / Welcome to our first session on credit management. Using credit is really borrowing money or spending future income. How much future income can you spend? There is not a simple answer or even one right answer to this question.
The future has many unknowns - knowing your income and if you will get any raises, what your expenses will be, if you will have credit and how much it will cost are all questions that consumers ask. Variable rates are very common today so the terms change as the money market changes. Missed payments on a credit card can lead to a substantial increase in annual percentage rates and finance charges and can damage a credit score.
Activity 1
Warning Signs of Credit Overuse
Handout 1
After the participants complete the warning signs handout put up Visual 2 - If you Answered “Yes” / One way to look at debt levels is to look at your “comfort level” with debt. Does the amount of debt you have cause continuing concern for any family member? Are there arguments about finances? Let’s look at some of the Warning Signs Of Credit Overuse to see if you can identify any issues you may be having with credit.
Did the Warning Signs Of Credit Overuse activity raise some red flags for you? How do you feel about the comfort levels you have with current debt and about debt in general? For some, any amount owed may be a concern. A good spending plan that has examined the role that credit plays will help with these concerns. Hopefully you will be able to complete a spending plan after this session. If not, make it a priority soon. If you find yourself in the danger zone for debt, filling out a spending plan is a must! Let’s talk about some of the concerns that you put in the “Debt Worry Box.”
Activity 2
Debt Comfort Level, “Debt Worry Box” / Talk about some of the issues the audience raised or any related to the “debt worry box” where the attendees dropped questions as they entered the rooms.
Activity 3- Visual 3
Your Financial Situation. Pass out packet including handouts 2-6. / Worrying about debt may be unavoidable. Having a clear picture about your credit situation is the first step in learning to use credit wisely. There are three pieces to your credit situation 1) your net income, 2) your living expenses, and 3) your credit debt. You have been given a packet that can be used to determine these three steps. Hopefully you will fill these out carefully when you leave this class. For the exercises that we will be discussing in this session you can use estimates for income, expenses and credit debt.
Visual 4 – Determining Income
Discuss sources of income / The first step in understanding your finances is awareness of how much income you have. Let’s take a minute to look at some possible sources of income in your household. Where does your money come from? Salary is the net amount listed on your paycheck(s). When determining income from salary, it is best to not include salary from overtime unless this is something that you can always depend on.
Let’s look at this list and discuss any other sources of income some of those are listed in your handout for determining income.
Visual 5 – Determining Expenses
Visual – 6 Occasional Expenses / Expenses include all money paid out during the month, and even the year, that go toward recurring expenses. Some expenses do not occur every month and it is these expenses that cause problems for many families. Completing a written spending plan like the one you have been given can show you how this fits into the overall picture. People who have never done a written plan will recognize these periodic expenses as the “spoilers” in meeting financial goals. Expenses like gifts, vacations, property taxes, tuition and school fees, clothing and medical costs can come due at anytime. Failing to consider these costs and set them aside into a reserve account prevents success for many people.
Visual 7 – Reserve Account / Starting and maintaining a reserve account is the secret to winning the financial game. Those who anticipate expenses and plan for them can pay when the bills are due, those who do not get behind on bills or use credit to meet expenses. Don’t forget to count these costs! If you need help remembering what those expenses might be, you can use the seasonal and occasional expenses worksheet in your handouts (worksheet 4).
Visual 8 – Defining your Debt / Now for your monthly debt payments, take the total of what you should be paying monthly for car payments, charge cards, bills you owe for past expenditures such as the doctor or dentist, loans, and so forth. Don’t list any bills that are current for utilities and taxes. If you don’t know how much your minimum monthly payment will be on credit cards, estimate 3% of the total amount you owe. The balance refers to how much you have left to pay on that debt. This may not be obvious for things like cars since much of the first payments are interest. You may find it on your statement, if not call the lender.
Visual 9 – Is there a debt problem?
Visual 10 – Sometimes looks like this / Now that you have the three pieces of your financial puzzle you will be able to tell if credit is causing a problem for you. One way to determine this is simply to take your income and subtract your expenses to see how much is available for paying debts.
Visuals 11 & 12 Debt/income ratios / There is a tool that financial planners and lenders use to make judgments about an individual’s financial fitness. That tool is called the debt/income ratio. This tool can help you estimate if you are approaching or even past the limit of debt that is manageable. Your debt income ratio is simply your debt divided by your income. This activity shows you how to figure it and how to use it.
Activity 4
Debt/Income Ratio / Give participants calculators if available. To help participants remember how to figure debt/income ratios work an example or two on your transparency. Hand out “Have you reached your debt limit?
Tracking tool / Give participants the handout for tracking expenses and encourage them to complete this exercise after they fill out the budget sheet. Ask for questions and comments.
Adapted from Master Your Dollars: Using Credit Wisely, Dottie Goss, Ph.D. by Sissy R. Osteen, Ph.D, CFP®, Glennis M. Couchman, Ph.D.; special assistance from Sandra Jones, Stephens County, Oklahoma Cooperative Extension Service. 2005.
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Handout 1
Warning Signs of Credit Overuse
YES NO
Are you unsure about how much you owe?
YES NO
Do you skip some bills to pay others?
YES NO
Do you have insufficient cash saved for emergencies?
YES NO
If you lost your job, would you have trouble paying for your basic living expenses?
YES NO
Have you postponed medical or dental appointments because you can’t afford them right now?
YES NO
Do you find that you and your partner argue about money?
YES NO
Are you receiving calls from creditors about overdue bills?
YES NO
Do you find yourself exceeding your monthly budget for necessities like groceries and gas?
YES NO
Are you using an increasing percentage of your monthly income to pay off debts?
YES NO
Can you only make the minimum payments on your credit cards?
Source: National Foundation for Credit Counseling (2010)
Handout 2
Determining Monthly Net Income
Worksheet 1
Source of Income / Weekly / Bi-Weekly / Monthly / YearlyPay Check #1
Pay Check #2
Pay Check #3
Pay Check #4
Tips
Commissions
Social Security or SSI
Retirement
Public Assistance
Child Support
Alimony
Veterans’ Benefits
Unemployment
Interest
Dividends
Gifts of Cash
Income Tax Refunds
Student Loans
Rental Income
Other
÷ 12
Totals
Monthly Expenses
Worksheet 2
Current / AdjustedRent or House Payment
Home Repairs *
Utilities
Groceries
Lunches
Tobacco, Alcohol
Toiletries, Personal Items
Diapers, Formula, Baby Supplies
Allowance, School Expenses*
Barber, Beauty Shop
Gasoline
Car Maintenance*
Insurance*
Medical*
Clothing*
Dry Cleaning, Laundry
Gifts*
Newspapers
Vacations*, Out of Town Trips
Entertainment
Contributions
Child Care/Child Support
Pet Expense*
Miscellaneous*
Total
1. Total Monthly Net Income
2. Monthly Living Expenses (subtract this from 1)
3. Balance for Creditors
4. Payments on credit debt
5. Amount left
6. *For Reserve Account
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Explanation of Monthly Budget Expenses
1. Rent or house payment- the actual amount you pay per month for your rent or mortgage payment. Sometimes a mortgage payment includes taxes and insurance. Be sure and list the total payment. Also include lot rent if you have a mobile home.
2. Home repairs are all the costs expended on your home during the year and include such things as paint and wallpaper, plants, seeds, and fertilizers for the yard, as well as chemicals and treatment for a pool or septic tank. Add all of these up and divide by twelve.
3. Utilities are your expenses for gas, electricity, water, and telephone (including home phone, mobile phone and internet service).
4. Groceries are all items purchased at the grocery store. You may include items such as toothpaste, and personal care if you buy these all together.
5. Lunches include all lunches eaten out of the home whether work and school lunches or snacks and colas.
6. Tobacco and alcohol are for tobacco products such as cigarettes and cigars, pipe or chewing tobacco, and alcoholic beverages.
7. Toiletries include all personal care items not purchased at the grocery store: toothpaste, shampoo and hair care products, make-up, deodorant, cologne, and soap and lotions.
8. Diapers, formula, and baby supplies, are those things you purchase regularly for baby care.
9. Allowance or school expenses include any money for allowances given to children or other family members, and expenses for school such as lab fees, cost of field trips, special lessons and tutoring and school supplies.
10. Barber and beauty shop. Any expenses for going to a shop for haircuts, coloring, or styling, as well as manicures. If this is an irregular expense, remember to use the formula above to figure it as a monthly expense.
11. Gasoline is the amount you spend to fill up the car with gasoline. If you do this weekly remember to multiply your weekly amount by 4 to get a monthly amount.
12. Car maintenance is difficult to determine because we don’t anticipate repairs. Base repairs on what you have done during the life of the car, the year and repair records of you car. You can consult a consumer magazine to get an idea of what repairs your car might need, or call a garage that specializes in your model to ask questions. In addition, figure out how much you spend a year on oil changes, what you need to set aside for replacing any tires, and finally what it costs each year to get your tags replaced. Divide the yearly expenses by 12 to get the monthly amount.
13. Insurance includes life, car, renter’s, health (if not deducted from your paycheck), and property insurance if this isn’t included in your mortgage payment. Car and house insurance are often paid periodically so remember to divide by the number of months of coverage.
14. Medical includes expenses for doctors, dentists, eyeglasses and contacts, medications, and money to cover the deductible, co pay, or out of pocket expenses on your medical or health insurance.